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G.I.CAPITAL CORP.PORTFOLIO REPORT FOR OCTOBER 2012
cont
G.I. Capital Corp. October 31, 2012 Report Summary
The spotlight was on the US Presidential elections for the month
of October.
Now that Obama is in, the market has turned its attention to the
fiscal cliff
issue, which is the combination of expiring tax cuts and
spending cutstotalling $560 billion, or ~4.5% of GDP. As we focus
in on this issue, it
brings to light how dramatically things have changed in the US
over the last
60 years. Bill Hallman, our Research Analyst provides his
thoughts:
"The Night Hank Williams Came To Town"
By John R. Cash
Harry Truman was our president
A coke and burger cost you thirty cents
I was still in love with Mavis Brown
On the night Hank Williams came to town.
What was America like 60 years ago? Well, Hank Williams Senior
did tour
the country singing 'Jambalaya', 'Cheatin' heart' and 'I saw the
light'. I love
Lucy debuted on TV in October of 1951 and a baby boom was under
way.The Depression was over, the war was over and the economy
was
expanding. In a nutshell everything was good. The government was
running
surpluses to pay off the war debt and the FHA was making home
ownership
a new reality for the middle class. Back then, savings were
rewarded and
borrowing was chastised.
Im sure this all comes in stark contrast to today. The new
normal now
consists of trillion dollar deficits, a no growth economy and an
economic
environment that punishes savers while rewarding borrowers under
the
guise of zero interest rates. Imagine what Harry Truman would
think of the
$3.46 trillion spent by todays government? Could he even have
dreamed
that some future government would burn through more than 80
times his
total outlay in 1950?
We are where we are: Today the United States has amassed $16.2
trillionin debt. According to the most recent estimates, the
countrys population is
314,694,000. That equals $51,622 of debt for every man, women
and child.
Considering the precipitous decline in the percentage of
households that
actually pay any federal taxes and the corresponding rise in
households
G.I. Capital Corp. is awealth management firm
specializing in developing
customized investmentsolutions for its clients.
We are a boutique firm
focused on managing ourclients portfolios, offering
a high level of research
and service to a limitednumber of clients. Our
client base consists of
professionals, executives
and business owners.
receiving selected government payments, the total debt can only
get larger and the burden is being born by
a shrinking number of taxpayers. This is not a new problem; it
is just getting to be a bigger problem that no
one is willing to tackle in a realistic manor. According to
statistics compiled by the White House Office of
Management, the countrys expenses have exceeded revenue in all
but 5 of the past 47 years. There was a
surplus in 1969, 1998, 1999, 2000 and 2001, yet those years
would appear as anomalies against the trend.
With all the brainpower in Washington and the consequences of an
out of control deficit (look at Greece and
Spain for examples); why cant this problem be resolved? The
answer is the entitlements. They are the little
secret that neither political party is willing to talk about.
For example, last year, the main entitlements of
Social Security, Medicare and Medicade, accounted for 56% of
expenses. Forty years ago, entitlementswere a mere 25%. Eighty
years ago it was less than 5%. According to recent polls, 80% of
Americans are
concerned about the rising deficit and debt. However, when
polled again, 69% and 78% are opposed to
Medicaid and Medicare cutbacks. How can you reduce the debt
without reducing the entitlements?
President Obamas campaign platform identified the wealthy
needing to pay more taxes and bear more of
the burden. This statement might poll well with the 99%, but
unfortunately at best, the facts dont add up and
at worst you risk driving an already shrinking taxpaying base
out of the country. We have estimated that
President Obamas deficits are expected to compound by another $8
trillion from 2012 to 2020. The much
publicized Buffet Rule would only generate an additional $31
Billion in tax revenue. Where is the balance
to come from? Aside from outright default, which we dont
consider an option, the only way to solve the debt
problem is to reign in entitlements and reduce spending.
I am entitled to my entitlements: Social Security and Medicare
alone account for $31 trillion of Americas
long-term liabilities. This off balance sheet liability dwarfs
the $16.2 trillion in total debt. Hard choices need
Portfolio Performance for Accredited Clients
Asset Allocation for Portfolio by Strategy
Benchmark represented by: 40% i-Shares Scotia Capital Universe
Bond Ind ex, 20% TSX Composite Index, 40% MSCI World Index, in
CDN$. Note: The composite portfolio includes all relevant medium
risk portfolios that meet the composite guidelines.
Compositereturns include dividends and are net of all fees. Past
performance is not indicative of future returns.
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G.I.CAPITAL CORP.PORTFOLIO REPORT FOR OCTOBER 2012
The third part of the fiscal cliff is its immediate effect, an
approximate
50% reduction in federal deficit. Wow.
It all becomes effective January1, 2013, if no laws are passed
to
change it. So the net effect is higher taxes, smaller government
and
a smaller budget deficit. Two out of three is not bad. However,
no
politician will ever benefit from smaller government, and no
voter
wants to see a weaker social net to support them. That is why we
will
see an agreement done, probably before January 1st.
Portfolio Changes
We continue to find value in the high yield sector. One of
the
interesting features of the current market is that there seems
to be a
total lack of interest in many of the smaller names. In a
normal
market, as soon as any news comes out on a particular company,
it
gets priced in immediately, meaning there is no advantage to
trading
on that news. In todays market we continue to see examples
where
positive news comes out and the market simply doesnt
respond.
Such was the case with Ivanhoe Energy. We have been watching
the
convertible debentures on this one for some time. The company
has
a number of development projects in Canada, Ecuador and
China.
The company announced in Jan 2012 that it was selling one of
itsChina assets for between $85-160 million. They are not cash
flow
positive, so this cash influx would give the company
substantial
breathing room, and more or less ensure sufficient liquidity to
pay off
the 2016 debentures. However, the deal required a number of
approvals, and had dragged on into October. The market seemed
to
be skeptical (and rightly so) on whether deal would close, and
the
debentures traded down to $65 (on $100 par).
In October, and company announced that they had signed a
definitive
agreement with Shell China and that most of the other conditions
had
been met. We expected a substantial move in the price of the
debentures on this news, but it only traded up to $70-71,
resulting in
a yield to maturity of ~17%. We took advantage of this, and
bought in
at this level. There is still a risk that the Chinese government
will notapprove the deal, but the return more than compensates for
this risk.
We also take some comfort in the fact that although the
company
does not have positive cash flow, they are asset rich. In
addition, the
Chairman, Billionaire mining investor Robert Friedland, has a
large
stake in the company--~$48.5 million at the time of our
investment,
including $17 mil in Debentures/loans, and the balance in
common
stock that sits behind our Debs in the capital structure. We
are
confident that Friedland will not allow the company to default
on its
obligations.
Market Performance
Benchmark S&P TSX S&P 500* MSCI World Gold Oil-WTI
USD/CAD
Exchange Rate**
Cdn Bond
ishare (XBB) Distressed
Dedicated
Short
Convertible
Arbitrage
Month End 1,077,820 12,417 1,412 1,302 1,668 86.2 1.000 31.47
632 44 384
1-month 0.46% 0.81% -1.98% -0.76% -2.94% -6.32% -1.67% -0.03%
0.95% -0.44% 0.86%
YTD 4.38% 3.86% 12.29% 10.06% 9.76% -13.06% 2.10% 2.74% 5.46%
-10.52% 4.98%
2011 -0.53% -11.07% 0.00% -7.61% 9.57% 8.49% -2.38% 9.12% -4.24%
3.85% 1.13%
* The returns are calculated in the currency of the holding;
**Monthly average exchange rate of USD to CAD; Source: Globefund,
CSFB/Tremont
to be made. Thankfully, Americans have a long history of
demonstrating sacrifices today in order to make a better country
for
their children. No one has benefited more from those sacrifices
than
the current baby boom generation. Perhaps now may be the time
for
them to show leadership and make the choices that will
preserve
their nation for their children and grandchildren. As Robert
Emmet
so eloquently stated, There are in every generation those who
shrink
from the ultimate sacrifice, but there are in every generation
those
who make it with joy and laughter and these are the salt of
the
generations.
Market Review
We saw a very tepid move in the markets as the participants
were
awaiting the results of the US election. The S&P/TSX in
Toronto was
up 0.8% to 12,417, while the S&P 500 was down 1.9% to
1,412.
With the US elections behind us, the markets are starting to
worry
about the fiscal cliff which if not dealt with timely and
properly could
jeopardize the US economy.
All ten major TSX sectors posted gains in October with
Telecom
performing the best, gaining 3.6%, due to strong earnings
from
Rogers Communications.
Internationally, Hong Kong was the best performing index rising
3.8%
while Taiwan was the worst performing index sliding 7.1%.
What is the fiscal cliff? The financial media classified the
"fiscal cliff"
as the risk that deadlock in Washington D.C. will result in huge
tax
increases and spending cuts, a combination that could cut the
gross
domestic product (GDP) by 1.4% (White House) to 2.0% (Fitch)
in
2013. However, we believe there's zero chance this will
occur.
Politicians never cut spending. Cutting spending is equivalent
to
reducing the government's power. And politicians will never do
that.
That means a deal will be reached to raise taxes.
Markets hate uncertainty. The big uncertainty right now is all
about
the upcoming "fiscal cliff." But let's ignore the national media
and
figure out what US is facing.
There are three parts to the cliff. The first part involves tax
increases,and many of them. The special 15% tax on dividends will
go away,
and those distributions will be taxed as regular income. That's
39.6%,
PLUS the new 3.8% Obamacare tax (for a total tax rate of 43.4%
on
incomes exceeding $200,000 for individuals, and $250,000 for
households). Long-term capital gains of less than five years
will be
taxed at 23.8%. Long term capital gains, ie five-year and
longer, will
get hit with a tax of 21.8%.
As it stands now, five out of six income brackets (including the
very
bottom one) will see income tax rates go up. And a temporary
payroll
tax reduction ends, hitting workers with a 2% tax hike.
The second part of the fiscal cliff is a whole slew of
automatic
spending cuts to more than 1,000 government programs,
includingdeep cuts to Medicare and defense spending.
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G.I.ALTERNATIVE INCOME STRATEGY OCT 2012
This monthly update does not constitute or purport to constitute
a complete description of the G.I. Capital Corp. Alternative
Investment Strategy and is in all respects subject to the more
detailed provisions found in the
fund's declaration of trust. The Alternative Income Strategy is
only available to GI clients who have engaged GI to manage their
account under the alternative income mandate as outlined in their
investment policy
statement. The returns above are net of all fees, other than
management fees. The references to the target rates of return are
provided for illustrative purposes only and there can be no
assurance that the fund will beable to achieve the targeted rates
of return.
GICAPITAL
G.I. Alternative Income Strategy
The Alternative Income Strategy is an alternative to traditional
bond funds, which although carry very low credit risk,currently
have minimal return; and to equity funds that exhibit high
volatility.
The Alternative Income Strategy seeks to invest in alternative
income strategies like private mortgages and asset backedloans that
offer higher returns, while still providing reasonable security to
cover the loans.
The strategys objectives are to preserve capital, minimize
volatility, have a low or zero correlation with stock and
bondmarkets, and achieve an annualized return of 8-10% net of all
fees.
PORTFOLI O PERFORMANCE FOR ALTERNATI VE I NCOME STRATEGY
Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Tota
2010 0.84% 0.78% 0.87% 0.80% 0.83% 0.54% 4.75%
2011 0.63% 0.68% 1.33% 0.91% 0.72% 1.91% 1.26% 0.93% 0.90% 1.11%
0.83% 2.50% 14.59
2012 0.81% 0.53% 0.68% 2.43% 2.95% 0.06% 0.15% 0.29% 0.89% 0.57%
9.83%
PROPERTY BY CLASSIFICATION
*Note: The property classifications only apply to real estate
holdings.
PROPERTY BY LOCATION
*Note: The property locations only apply to real estate
holdings.
SERVICE PROVIDERS
Custodian (for Fund)
Administrator
Legal
Auditor
Custodian (for Managed Accounts)
41%
6%
43%
1%9% Residential
Hospitality
Retail
Mixed Use
Self Storage
14%3%
37%
15%
3% 28%
AB
BC
ON
QC
MB
USA
PORTFOLIO BREAKDOWN BY ALLOCATION
FEATURE INVESTMENT
Cobour g Se l f S to rage, Rea l Es ta te Equ i t y , Ontar
io
This is a property of which the pool owns a 50% stake. It was
purchasefrom the original builder who was willing to finance the
purchase throug
a vendor-take-back mortgage at very favourable terms. Our
operation
partner on the deal is TVG Canada. TVG is a New York base
development and management company specifically focused on
se
storage. TVG felt that the rents were below market and that
addition
storage space could be developed on the property. We purchased
it at
very attractive valuation, ie a cap rate of 10, and are
targeting a lo
double digit cash flow yield, and an IRR in the low 20s,
throug
increased asset value once net operating income is ramped up
throug
improved operational efficiencies and the build out of the
addition
capacity. The exit strategy would be an outright sale, or a
re-financin
that would repatriate our original equity while allowing us to
maintain a
ongoing interest in the property. We felt this was an attractive
retuprofile given that self storage is a very low risk class of
real estate give
its simplicity, low operational costs, and the fact that it is
fair
insensitivity to economic activity.
Se cu r i t y T y p e
Pe rce n ta g e
W e i g h t i n g
Loan To
Va lue
R a t i o
v e r a g e
Ex pec te d
M a t u r i t y
( M o n t h s )
A v e r a g
Ex pe cte
Y ie ld
F i r s t Mo r t g a g e 6 % 4 4 % 2 0 7 %
Su b o r d i n a t e d F i r s t 2 3 % 6 6 % 2 1 1 2 %
Se c o n d M o r t g a g e 1 2 % 7 2 % 1 6 1 1 %
Rea l Es ta t e Equ i t y 2 6 % N/ A 4 7 8 %
Asse t Back ed Loans 6 % 4 8 % 3 9 %
D i st r e s s e d D e b t 6 % N/ A 2 1 1 2 %
Cash 2 1 % 0 % 0 0 %
To ta l / W e i gh te d AVG 1 0 0 % 4 4 % 2 2 7 .7 %
G.I.CAPITAL CORP.240 Duncan Mill Rd Suite 806 Toronto, Ontario
M3B 3S6
Mark Irwin, CFA 647-260-3388*223 Jim Goren, CFA 647-260-3388*222
Bill Hallman, CFA 647-260-3388*228 Gino Scialdone
647-260-3388*229
[email protected] [email protected]
[email protected] [email protected]. Capital
Corp. (GI) is a wealth management firm specializing in developing
customized investment solutions for its clients. We are a boutique
firm focused on managing our clients portfolios, offering a high
level of
research and service to a limited number of clients. Our client
base consists of professionals, executives and business owners.
Visit us atwww.gicapital.ca
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]%20%09%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%[email protected]:[email protected]%20%09%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%[email protected]://www.gicapital.ca/http://www.gicapital.ca/http://www.gicapital.ca/http://www.gicapital.ca/mailto:[email protected]%20%09%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%[email protected]:[email protected]:[email protected]
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G.I.ALTERNATIVE HEDGE STRATEGY OCT 2012GICAPITAL
G.I. Alternative Hedge Strategy Pool The Alternative Hedge
Strategy is an alternative to traditional bond funds, which
although carry very low credit risk, curre
have minimal return; and to equity funds that exhibit high
volatility. The Alternative Hedge Strategy seeks to invest in
alternative strategies like hedge funds, private equity, and real
estate,
which offer higher returns, at a reasonable risk, while
minimizing exposure to global stock and bond markets. The
fundprovides access to sophisticated private investment vehicles
traditionally reserved for large pension plans and the ultra hinet
worth investors.
The strategys objectives are to preserve capital, minimize
volatility, have a low or zero correlation with stock and
bondmarkets, and achieve an annual return of 7-9% net of fees. The
pool is a core holding across all of GIs managed accountsPORTFOLI O
PERFORMAN CE FOR ALTERNATI VE HEDGE STRATEGY
Ye a r Ja n Fe b M a r A p r M a y Ju n Ju l A u g Se p O ct N o
v D e c T o t a
2011 -0.07% - 0 . 0 7
2012 0.31% -0.16% 0.61% 0.19% 3.28% -1.19% -0.70% 0.34% 1.67%
1.52% 5 . 9 5
STRATEGY COUNTRY DESCRI PTI ON
Securitized Fixed
IncomeUS
Long senior or mezzanine tranches of securitized bonds (RMBS,
CMBS, CDOs, CLOs) through granul
analysis of underlying assets in the pool. Hedged through
tactically shorting the ABX (RMBS Index),
High Yield Bond
Strategies
USPublically traded bonds that have fallen below 75% of their
par value. High current yields and yield
maturity. Some hedging through shorts on equities and
non-distressed bonds.
Private Distressed
DebtUS
Private placements into charged off consumer debt at a severe
discount to face value (ie 1-2% of pa
value). Purchased from distressed banks trying to clean up their
balance sheets.
Hedged Fixed
IncomeCAN High quality fixed income fund which has been hedged
against a rise in interest rates.
Distressed Real
EstateUS
Private placements into real property with positive cash flows,
purchased at significant discounts to
replacement cost.
This monthly update does not constitute or purport to constitute
a complete description of the G.I. Capital Corp. Alternative Hedge
Strategy and is in all respects subject to the more detailed
provisions found in the fund's declaration of trust. The
AlternativeHedge Strategy is only available to GI clients who have
engaged GI to manage their account under the alternative
income/hedge mandate as outlined in their investment policy
statement. The returns above are net of all fees, other than
management fees.The references to the target rates of return are
provided for illustrative purposes only and there can be no
assurance that the fund will be able to achieve the targeted rates
of return.
INVESTMENT BY ASSET CLASS
4% 25%
17%
8%6%
33%
8%
Distressed Real Estate
Hedged Fixed Income
High Yield Bond Strategies
Global Macro
Private Distressed Debt
Securitized Fixed Income
Cash
FEATURE INVESTMENT
Hedged Fixed Income Fund: This is a hedge fund strategy that
owns high quality long maturity bonds, but has hedged out the
duration risk, ie the risk
interest rates rising over time and depressing the value of the
bonds, as yields rise. We like this strategy as it provides a
solution some of the challen
facing investors in the current fixed income environment. With
so much risk in the equity markets, investors have flocked to short
term bonds, push
the prices up and the yields to maturity down. As a result short
term investment grade bonds pay very little. On the other hand,
longer term bonds
have very reasonable yields, a result of investors avoiding the
longer end of the curve due to the duration risk. Being able to
capture high coupons
high quality investment grade bonds while hedging out the risk
of rising rates is a very attractive strategy in the current
environment. In addition to
core strategy, the fund can also add additional alpha by
tactically adjusting duration on a short term basis, depending on
the prevailing investm
climate. In fact, they are able to position the fund with
negative duration, meaning that the fund would profit from rates
moving up, as opposed t
traditional bond portfolio that would lose value under that
scenario. The expected return profile for this strategy is
7-8%/annum net.
MONTH PERFORMANCE BY STRATEGY
0.28%
0.00%
1.00%
2.84%
0.73%
0.53%
Other
Distressed Real Estate
Private Distressed Debt
Securitized Fixed Incom
High Yield Bond Strateg
Hedged Fixed Income
